MTEF: FG Lower Budget 2022 Deficit on Optimistic GDP Projection
MTEF: FG Lower Budget 2022 Deficit on Optimistic GDP Projection
Nigeria’s federal government (FG) lowered the budget deficit for the fiscal year 2022 amidst an overly optimistic gross domestic product (GDP) growth projection, detail from the Medium Term Expenditure Framework (MTEF) approved by the lawmakers last week shows.
In their separate reactions, analysts see a 4.2% growth projection as overly optimistic, citing prevalent downside risks including high unemployment, poverty rate, insecurities, weak infrastructure and FG dependence on revenue from crude oil.
To support the fiscal spending plan next year, Nigeria plans to borrow N4.9 trillion as revenue expectation falls behind Nigerian expenditure.
Nigerian Senate has recently approved the Federal Government’s N13.98 trillion proposed spending for the fiscal year 2022 but again revenue expectation fails to meet spending plans, resulting in the budget deficit.
Oil remains the mainstream earnings source for Africa’s largest economy amidst fiscal slippage recorded in the first half of 2022.
To drive government revenue, the Nigerian government plans to raise oil production to meet the Organisation of Petroleum Exporting Countries and allies quota, which the country has been undersupplied, thus form a key factor driving persistent fiscal slippage.
The oil market has continued to rally despite multiple threats from the global economy, including rising delta variants and weak economic data.
Breakdown of the approved appropriation bill showed that FG is targeting a marginal increase in revenue of N8.36 trillion compare with last year, which resulted in a budget deficit of N5.6 trillion.
The amount is a little lower than N5.71 trillion recorded in the fiscal year 2021, analysts said, noting that part of the amount would be financed by N4.89 trillion borrowings – inclusive of both foreign and domestic debts.
Federal Government planned to generate a total sum of N7.89 trillion revenue target in 2021, though data from Budget Office for the first five months show income underperformed by about 50%.
Data from the budget office and the National Bureau of Statistics reviewed by MarketForces Africa shows that FG’s cumulative revenue from 2015 to 2019 is a little less than N16 trillion.
Nigerian government generated a total sum of N2.465 trillion in 2015. A year after, the amount generated dropped to N2.277 trillion, according to the budget office.
By 2017, total revenue generated increased to N2.667 trillion, then to N3.963 trillion in 2018 from where it peaked at N4.540 trillion before pandemic breaks in 2020.
MTEF shows that the revenue projection for 2022 is based on a crude oil benchmark price of US$57 per barrel, with an exchange rate of N410.15 to a dollar and crude oil production of 1.88 million barrels per day (mbpd).
Cowry Asset analysts see $57 per barrel as rather optimistic at the moment especially as Nigeria has been unable to meet its production quotas due to technical issues, though the country is now asking OPEC+ for baseline change.
In its macroeconomic note, Afrinvest applauds the conservative oil price benchmarks of $57.00/bbl (for 2022/3) and $55.00/bbl (for 2024) as we believe it is modest enough to stand the test of time, irrespective of future uncertainties around global demand for crude oil and the emergence of a major shock like the pandemic.
Likewise, the firm express view the assumption of a near-term deceleration of the inflation rate looks realistic (given the high base-year effect), barring any disruption to domestic food production and a material surge in the price of energy items.
However, the investment firm sees the GDP growth projection of 4.2% for 2022 overly optimistic, given the prevalence of inherent downside risks such as a high unemployment rate that printed at 33.3% and poverty at 43.0%.
The downside risk to the projection also includes the widespread insecurity, weak infrastructure, and FG’s high dependence on revenue from crude oil which stands at 58.0% of revenue.
“We are not very convinced about sustaining the exchange rate at ₦410.15/$1.00 over the medium term, given the downside factors such as the renewed apathy of foreign investors for Nigeria assets, and the protracted FX crises due to disequilibrium in demand and supply”.
According to data, foreign portfolio investments (FPI) sloped downward 61.1% year on year in the first half of 2021.
Nigeria remains hopeful that the Oil group will grant its latest request to raise the baseline from which its crude output quotas are calculated, despite previous attempts being turned down.
“We have requested that OPEC+ reviews of our production quota, and we expect that they will look into it because we have a capacity for more production than we are producing now,” Nigerian oil minister Timipre Sylva told reporters at the Gastech conference in Dubai.
Abuja submitted its latest request at the group’s 21 July meeting, at which several other members of the coalition — namely Saudi Arabia, Russia, the UAE, Iraq and Kuwait — were granted changes to their reference production levels to help end a two-week policy impasse that was triggered by the UAE’s insistence on a baseline revision.
The UAE argued that its original baseline is “outdated” and said it would object to an extension of the output restraint deal beyond April next year unless it was changed.
Nigeria also argues that its baseline, which stands at 1.829mn b/d, is outdated as it was determined on production levels during a period in which circumstances were atypical.
“What we are saying is that the data we have with OPEC+ on which they based our quotas was crisis time data. It was produced during the Niger Delta crisis,” Sylva said.
“We believe that now the Niger Delta crisis is no longer there, we can produce a lot more than that.”
Sylva said Nigeria has shown in the past that it has the capacity to produce up to 2.6mn b/d, and has therefore requested its baseline be raised to 2.2mn b/d. “We have the capacity, and we have proven it,” he said.
With oil demand beginning to pick up as Covid-related restrictions ease, “I believe Opec+ will be willing to look at this again because we have a very good case… and I think they too have seen we have a good case.”
In the framework, FG also projected an inflation rate of 13% as well as a Gross Domestic Product (GDP) growth rate of 4.20% for the year 2022.
On the expenditure side, FG proposed to spend N6.21 trillion on Recurrent (non-debt) expenses – of which personnel costs amounted to N3.47 trillion –, N3.21 trillion is expected to be spent on Capital expenditure, Special Intervention of N350 billion, Debt servicing of N3.12 trillion.
Statutory transfers amounted to N613.4 billion, Sinking Fund worth N292 billion, as well as Pension, Gratuities and Retirees Benefits of N567 billion amongst other things.
Nigeria’s quota for September 2021 was 1.614 million (without condensates) and was scheduled to increase by 17,000 bpd each month in line with OPEC+ plans to ease production cuts implemented as a result of the COVID-19 pandemic.
More importantly, Nigeria has been grappling with meeting with the production quota allocated to it by OPEC+ and its allies, given some technical challenges.
Citing S&P Global Platts, Cowry Asset said Nigeria reported crude output of 1.27million bpd in August which was lower than the 1.44 million bpd printed in July 2021.
Cowry Research feels that the state of infrastructure in the country does not match the current debt level. Hence, analysts said this explains the need for FG to direct proceeds from borrowing to scaling up infrastructure.
“We commend the efforts of FG to increase its crude oil supply in order to boost foreign earnings. This, in addition to the Special Drawing Rights worth USD3 billion from IMF, could result in Naira appreciation in the short to medium term”, analysts said.
Nigeria requests for a higher baseline comes at a time when it is struggling to reach its current OPEC+ cap as a result of infrastructure and operational problems.
The country’s production fell to a seven-month low of 1.34 million barrels per day, according to Argus estimates, which was around 260,000 barrels per day short of its August quota.
“Current production is a little less than 1.7 million barrels per day because we had some issues shutting down some of the reservoirs to meet the OPEC quota,” Sylva said. “And now, to bring production back there have been some technical challenges.”
Sylva said he has been “assured” that the country can lift output back to its quota within the next “one or two” months.
MTEF expects the net federation account revenue and FG’s share of revenue available for budget, including earnings from government-owned enterprises (GOEs) to grow at a CAGR of 22.3% and 22.8% over the actual amount in 2020 (₦5.4tn and ₦3.9tn) to ₦10.5tn and ₦8.4tn respectively in 2022 and to ₦14.8tn and ₦10.9tn in 2024.
Afrinvest said although the revenue projections are quite small to meet Nigeria’s growing needs, analysts said they are not convinced of the government’s ability to meet these targets, given downside risks such as the inefficiency of most government revenue generating agencies, tough business environment, and uncertainty on global demand and price of crude oil.
Besides, the firm’s analysis of the actual net federation account revenue and FG’s share of revenue available for budget between 2018 and 2020 shows that while net federation account revenue fell from ₦6.1 trillion to ₦5.4 trillion in 2020, FG’s share of revenue available for budget stayed muted at ₦3.9 trillion.
For the expenditure segment, the MTEF estimated a CAGR of 10.5% to ₦14.0 trillion in 2022 and ₦16.8 trillion by 2024.
“Given the actual trend from 2018 to 2020 with an average annual growth rate of 10.8%, we feel the expenditure projection aligns with the historic expenditure growth trend of the current administration.
“Notwithstanding, we expect the actual deficit for each of the projected years to surpass the budgeted amount, given the aforementioned downside factors to the revenue projections”, Afrinvest stated.
MTEF: FG Lower Budget 2022 Deficit on Optimistic GDP Projection
